Welcome to the new Becker-Posner Blog, maintained by the University of Chicago Law School.

07/22/2007

Environment and National Security--Posner's Comment

I agree with Becker's excellent piece and have little to add. He is certainly correct that the political saleability of a carbon tax aimed at reducing carbon dioxide emissions that contribute significantly to global warming would be greatly enhanced by emphasizing the national-security benefits. That way both environmentalists, who tend to be liberals, and national-security hawks, who are almost always conservatives, might be induced to join in supporting such a tax.
It is an important detail to note that a carbon tax and a tax on gasoline or other fuels are not identical. A tax on gasoline would have a direct effect in reducing demand for oil, thus reducing, as Becker points out, the oil revenues of oil-producing nations. The tax would reduce demand, and since oil is produced with the usual upward-sloping supply curve, the price of oil is equal to the supply cost of the marginal output and thus generates enormous revenues for low-cost producers. But a gasoline tax would be inferior to a carbon tax from the standpoint of limiting global warming, because producers of oil, refiners of gasoline, and producers of cars and other products that burn fossil fuels would have no incentive to adopt processes that would reduce the amount of carbon dioxide emissions per barrel of oil, gallon of gasoline, etc. A carbon tax would create such an incentive and would also have a strong indirect negative effect on the demand for fossil fuels.
I would put greater weight on the environmental issue than on the national-security benefits of reduced demand for oil. I would thus be disinclined to encourage the substitution of coal for oil, as that would do nothing to reduce carbon-dioxide emissions though it would reduce our dependence on oil. If as I believe our greatest national-security threat is from terrorism, the benefits of reducing the world's demand for oil would be modest. The expense of terrorist attacks is small relative to the aggregate resources of countries that finance or permit their citizens to finance terrorism, and would still be small relative to those resources after the wealth of some of those countries declined somewhat as a result of a reduced worldwide demand for oil.
A separate concern is worldwide (and hence our) dependence on unstable sources of oil in countries like Venezuela, Iraq, Nigeria, Iran, and potentially Saudi Arabia. Coupled with growing demand for oil by China, India, and other developing countries, an uncertain supply could cause the price of oil to spike. That would not be altogether a bad thing because it would limit demand and thus reduce carbon dioxide emissions. Moreover, the spike would be a politically appealing occasion for the imposition of a stiff carbon tax that would reduce the revenues of the producing countries and (to the extent the tax did not reduce demand in the United States) transfer some of those revenues to the U.S. Treasury. The tax might not increase the price of oil to consumers significantly, because laid on top of the price spike it might so reduce the demand for oil that the cost of production fell steeply, assuming an inelastic supply.
A point Becker does not touch on is the importance of international cooperation to deal with environmental problems. Although the United States is about a quarter of the world's economy, even a 10 percent decline (at present unforeseeable) in our carbon-dioxide emissions and our burning of fossil fuels would have only a modest effect on global warming and on the overall demand for oil. Indeed the entire effect might be offset by soaring demand (and concomitant increases in carbon dioxide emissions) by China and other developing countries. There are very serious free-rider problems involved in reining in the use of fossil fuels by developing countries. Yet in other areas of global conflict, such as intellectual property (consuming countries in the developing world do not want to pay royalties to the producers of intellectual property), it has proved possible to overcome free-rider problems to a considerable extent through aggressive efforts to achieve international cooperation. The Administration seems not to have exerted such efforts with respect to environmental matters, and in national security too has generally preferred to go it alone.
The limits of unilateralism were underscored in an article in the Wall Street Journal on July 20 explaining how smog in San Francisco and Los Angeles is being exacerbated by enormous plumes of polluted air ("rivers of polluted air," the author called them) blown eastward over the Pacific Ocean from China. Of course we cannot order China to stop polluting. But there is much that China wants from us that we should be able to give the Chinese at relatively low cost in exchange for better environmental controls. One would like to see the Administration more active in this area, but one of the casualties of the war in Iraq is distraction from other urgent global problems.

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